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These Seminar Notes: • Outline the basic records that must be maintained when handling various categories of trust money, specifically; o money that must be deposited to a general trust
Accounting and Controls in law practices TRUST MONEY & TRUST RECORDS Accounting and Support Staff Trust Accounts Department Law Society of New South Wales 170 Phillip Street, Sydney NSW 2000 March 2016 CONTENTS 1.1 1.2 1.3 2.1 2.2 2.3 2.4 3.1 INTRODUCTION IMPORTANCE OF RECORD KEEPING THE LEGISLATIVE REGIME FURTHER INFORMATION TRUST MONEY DEFINITION OF TRUST MONEY WHAT IS TRUST MONEY? 10 AUTHORISED TO RECEIVE TRUST MONEY 13 TRUST MONEY DECISION CHART 14 DEALING WITH TRUST MONEY - GENERALLY 15 HOLDING, DISBURSING AND ACCOUNTING FOR TRUST MONEY 15 3.1.1 3.1.2 3.1.3 3.1.4 3.1.5 GENERAL TRUST MONEY 15 CONTROLLED MONEY 15 POWER MONEY 16 TRANSIT MONEY 16 WRITTEN DIRECTION MONEY 16 3.2 3.3 INTERMIXING TRUST MONEY - SECTION 146 16 WITHDRAWING LEGAL COSTS FROM TRUST MONEY - SECTION 144(2)(B) 16 3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.3.6 3.3.7 METHOD – WITHDRAWAL ON ISSUE OF BILL OF COSTS OR MONEY LEGALLY PAYABLE – RULE 42(3) 17 METHOD – WITHDRAWAL WITH AUTHORITY – RULE 42(4) 17 METHOD – WITHDRAWAL FOR REIMBURSEMENT – RULE 42(5) 18 METHOD – WITHDRAWAL FOR A COMMERCIAL OR GOVERNMENT CLIENT – RULE 42(6) 18 COSTS DISCLOSURE - DIVISION OF PART 4.3 19 COSTS RECOVERY - SECTION 129(2) 20 AUTHORITY TO WITHDRAW COSTS FROM GENERAL TRUST ACCOUNT OR CONTROLLED MONEY ACCOUNT IS ESSENTIAL 20 3.4 3.5 3.6 4.1 5.1 5.2 DEFICIENCY IN TRUST ACCOUNT 20 FALSE NAMES IN TRUST RECORDS 21 UNCLAIMED MONEY 22 ACCOUNTING OVERVIEW 24 OVERVIEW OF TRUST RECORDS AND OFFICE ACCOUNT RECORDS 24 TRUST RECORDS 26 KEEPING OF TRUST RECORDS – SECTION 147 26 GENERAL PROVISIONS OF THE REGULATION RELATING TO TRUST MONEY 27 5.2.1 5.2.1.1 5.2.1.2 5.2.1.3 5.2.1.4 5.2.1.5 TRUST ACCOUNT STATEMENTS 27 A separate statement must be given for each; 27 A trust account statement must contain particulars of: 27 The law practice must give a trust account statement as soon as practicable after: 28 Exemptions from giving trust account statements at the end of June each Year: 28 Details to be included in Trust Account Statements 29 5.3 COMPUTERISED ACCOUNTING SYSTEMS – RULES 38 TO 41 29 5.3.1 5.3.1 5.3.2 INTRODUCTION 29 EXAMINED SOFTWARE PACKAGES 29 MONTHLY PROCEDURES 30 5.4 6.1 RECORDS TO BE IN PERMANENT FORM 30 GENERAL TRUST ACCOUNT 31 MAINTAIN GENERAL TRUST ACCOUNT IN NSW 31 6.1.1 HOLDING, DISBURSING AND ACCOUNTING FOR GENERAL TRUST MONEY - SECTION 138 31 6.2 GENERAL TRUST ACCOUNT RECORDS 31 6.2.1 6.2.2 6.2.3 6.2.4 SOURCE RECORDS 31 BOOKS OF PRIME ENTRY 32 BOOK OF SUMMARY 32 REPORTS 32 March 2016 6.3 6.4 6.5 ESTABLISHMENT OF GENERAL TRUST ACCOUNT - RULE 35 33 CLOSURE OF GENERAL TRUST ACCOUNT 33 TRUST RECEIPTS – RULE 36 33 6.5.1 6.5.2 6.5.3 6.5.4 6.5.5 6.5.5.1 RECEIPTS GENERALLY 33 CANCELLED RECEIPTS 35 MULTI RECEIPT 36 CLEARANCE FOR CHEQUES RECEIPTED 36 DISHONOUR OF CHEQUES RECEIPTED INTO GENERAL TRUST ACCOUNT 36 Recording Dishonoured Cheque 36 6.6 USE OF CREDIT CARD 38 6.6.1 6.6.2 RECEIPTS TO GENERAL TRUST ACCOUNT 38 CREDIT CARD “CHARGEBACK” 38 6.7 DEPOSIT RECORD – RULE 37 38 6.7.1 QUICK BANKING 39 6.8 WITHDRAWAL BY CHEQUE OR ELECTRONIC FUNDS TRANSFER - RULE 43 39 6.8.1 6.8.2 6.8.3 6.8.3.1 6.8.4 6.8.5 6.8.5.1 6.8.6 6.8.6.1 6.8.7 6.8.8 6.8.8.1 WITHDRAWAL BY CHEQUE 40 WITHDRAWAL BY ELECTRONIC FUNDS TRANSFER – RULE 43 41 AUTHORISED SIGNATORIES 43 Online Payments 43 WITHDRAWAL FOR LEGAL COSTS 44 CANCELLED CHEQUES 44 Procedures for cancelled cheques 44 REVERSAL OF A CHEQUE 45 Cheque reversal procedure 45 MULTI CHEQUE 45 STALE CHEQUES 45 Procedures for dealing with stale cheques 45 6.9 THE CASH BOOKS – RULES 44 AND 45 46 6.9.1 6.9.2 6.9.2.1 6.9.3 6.9.4 FORMAT 46 RECONCILIATION OF GENERAL TRUST ACCOUNT RECORDS – RULE 48 48 Cashbook balance 48 AMOUNT DEPOSITED TO AUTHORISED ADI 49 POSTING CASH BOOKS 49 6.10 RECONCILIATION STATEMENT – RULE 48(2) 50 6.10.1 6.10.2 6.10.3 PROCEDURES TO COMPLETE RECONCILIATIONS 50 AUTHORISED ADI ERRORS 53 UNIDENTIFIED DEPOSITS 53 6.11 INTEREST ON GENERAL TRUST ACCOUNTS 53 6.11.1 6.11.2 STATUTORY DEPOSIT 53 THE BALANCE OF TRUST FUNDS 54 6.12 TRIAL BALANCE STATEMENT – RULE 48(2)(B) 54 6.12.1 PREPARING A TRIAL BALANCE STATEMENT 54 6.13 TRUST LEDGER ACCOUNTS – RULE 47 57 6.13.1 PARTICULARS TO BE RECORDED IN TRUST ACCOUNT LEDGERS 58 6.13.2 FORMAT OF A TRUST LEDGER ACCOUNT 59 6.13.3 TRUST LEDGER ACCOUNT IN NAME OF LAW PRACTICE OR LEGAL PRACTITIONER ASSOCIATE 59 6.14 TRUST TRANSFER JOURNAL – RULE 46 60 6.14.1 PARTICULARS TO BE INCLUDED IN A TRUST TRANSFER JOURNAL 61 7.1 7.2 7.3 8.1 8.2 AUTHORISED SIGNATORIES 63 AUTHORITY TO OPERATE GENERAL TRUST ACCOUNTS OR CONTROLLED MONEY ACCOUNTS 63 NOTIFICATION REQUIREMENTS REGARDING AUTHORISED SIGNATORIES 64 PROCEDURES FOR NOTIFYING THE LAW SOCIETY COUNCIL OF AUTHORISED SIGNATORIES 65 WRITTEN DIRECTION MONEY - SECTION 137(A) 66 WRITTEN DIRECTIONS GENERALLY 66 PERSON LEGALLY ENTITLED TO PROVIDE WRITTEN DIRECTION 66 8.2.1 8.2.2 8.2.3 EXAMPLE OF WRITTEN DIRECTION MONEY 66 EXAMPLES OF POSSIBLE “LEGALLY ENTITLED” PERSONS 66 LAW PRACTICE MUST ENSURE PERSON IS “LEGALLY ENTITLED” 67 8.3 RECORD KEEPING REQUIREMENTS 67 March 2016 8.4 8.5 9.1 WRITTEN DIRECTION MONEY RECEIVED IN THE FORM OF CASH 67 TRUST ACCOUNT STATEMENT 67 CONTROLLED MONEY – RULES 61 TO 64 68 ELEMENTS OF CONTROLLED MONEY: 68 9.1.1 9.1.2 WRITTEN DIRECTION IN RESPECT OF CONTROLLED MONEY 68 NO WRITTEN DIRECTION 69 9.2 9.3 9.4 9.5 9.6 ESTABLISHMENT OF A CONTROLLED MONEY ACCOUNT: 69 RECORD KEEPING: 70 WRITTEN DIRECTION – SECTION 139 70 CONTROLLED MONEY RECEIPT – RULE 62 71 PAYMENT OF CONTROLLED MONEY – RULES 63 & 42 73 9.6.1 9.6.2 PARTICULARS TO BE RECORDED FOR WITHDRAWAL: 73 WITHDRAWAL OF LEGAL COSTS FROM CONTROLLED MONEY ACCOUNT 74 9.7 CONTROLLED MONEY REGISTER – RULE 64 75 9.7.1 RECORD OF CONTROLLED MONEY MOVEMENTS 75 9.8 9.9 10 10.1 10.2 CONTROLLED MONEY LISTING – RULE 64(8) 77 TRUST ACCOUNT STATEMENT – RULES 52 & 53 77 TRANSIT MONEY – SECTION 140 78 TRANSIT MONEY GENERALLY 78 RECORD KEEPING REQUIREMENTS 78 10.2.1 RETENTION OF RECORDS 78 10.3 10.4 11 11.1 11.2 TRANSIT MONEY RECEIVED IN CASH 78 TRUST ACCOUNT STATEMENTS 78 MONEY TO BE DEALT WITH UNDER A POWER – RULE 55 79 POWER OR AUTHORITY 79 RECORD KEEPING REQUIREMENTS 79 11.2.1 RECORDING ALL DEALINGS 79 11.3 REGISTER OF POWERS AND ESTATES IN RELATION TO TRUST MONEY – RULE 60 79 11.3.1 11.3.2 THE REGISTER OF POWERS AND ESTATES MUST RECORD: 80 POWERS AND ESTATES THAT MUST BE INCLUDED IN THE REGISTER 80 11.4 11.5 11.6 12 12.1 MONEY UNDER A POWER RECEIVED IN CASH 80 COSTS 81 TRUST ACCOUNT STATEMENT 81 INVESTMENT OF TRUST MONEY 82 WHEN INVESTMENT MONEY IS NOT TRUST MONEY 82 12.1.1 DISCLOSURE TO CLIENTS— WHEN INVESTMENT MONEY IS NOT TRUST MONEY SECTION 134 82 12.2 WHEN INVESTMENT OF TRUST MONEY IS TRUST MONEY 82 12.2.1 AN EXAMPLE OF WHEN INVESTMENT OF TRUST MONEY IS TRUST MONEY 83 12.3 REGISTER OF INVESTMENTS 83 12.3.1 12.3.2 12.3.3 REGISTER OF INVESTMENTS – INFORMATION REQUIRED – RULE 59 83 EXAMPLE OF INVESTMENT RECORD: 84 EVIDENCE OF INVESTMENT 84 12.4 12.5 13 13.1 13.2 13.3 13.4 13.5 13.6 14 14.1 14.2 14.3 14.4 14.5 COSTS 84 TRUST ACCOUNT STATEMENT 84 EXTERNAL EXAMINER’S REPORT – RULES 65 TO 69 85 WHEN IS A REPORT REQUIRED? 85 WHO CAN CONDUCT AN EXTERNAL EXAMINATION? 85 APPOINTMENT, CESSATION OR TERMINATION OF AN EXTERNAL EXAMINER 86 POWERS OF EXTERNAL EXAMINER 86 EXTERNAL EXAMINER’S REPORT 87 FINAL EXAMINATION – SECTION 68 87 STATUTORY DEPOSIT 88 AMOUNT TO BE DEPOSITED 88 WHEN AMOUNT IS TO BE DEPOSITED WITH THE LAW SOCIETY 89 NEW TRUST ACCOUNTS 89 CONTINUING TRUST ACCOUNT WITH NO CURRENT STATUTORY DEPOSIT 90 CONTINUING TRUST ACCOUNT WITH CURRENT STATUTORY DEPOSIT 90 March 2016 14.6 14.7 14.8 14.9 14.10 14.11 15 15.1 15.2 15.3 15.4 15.5 15.6 15.7 15.8 15.9 15.10 15.11 16 17 17.1 17.2 17.3 17.4 MORE THAN ONE AUTHORISED ADI ACCOUNT 91 WITHDRAWALS DURING THE YEAR ENDED FOLLOWING 31 MARCH 91 INSUFFICIENT FUNDS TO MAKE DEPOSIT 93 PROCEDURES IN DEPOSITING/WITHDRAWING THE STATUTORY DEPOSIT 93 CALCULATION SUMMARY 94 GENERAL 94 TRUST ACCOUNT INVESTIGATIONS 95 APPOINTMENT OF INVESTIGATORS 95 PRODUCTION OF RECORDS & INFORMATION 95 ADDITIONAL POWERS IN RELATION TO INCORPORATED LEGAL PRACTICES 95 COSTS OF INVESTIGATION 96 DEFINITION OF "AFFAIRS" 96 TYPES OF INVESTIGATION 96 NOTICE OF APPOINTMENT 97 CONDUCT OF INVESTIGATION 98 INVESTIGATION LETTERS 98 WILFUL AND/OR SUBSTANTIAL BREACHES 98 OBLIGATIONS OF LAWYERS AND OTHER PERSONS 99 SOLICITORS CONDUCT AND PRACTICE RULES 100 BUSINESS MANAGEMENT AND CONTROL 101 FILE REGISTER 101 REGISTER OF SAFE CUSTODY DOCUMENTS 102 REGISTER OF FINANCIAL INTERESTS 103 OFFICE REGISTERS 103 17.4.1 Photocopy Register 103 17.4.2 Fax Register 104 18 18.1 18.2 18.3 18.4 18.5 18.6 19 19.1 19.2 19.3 19.4 20 COMMON AREAS OF CONCERN 105 SECTIONS 129 / 137 – TRUST MONEY 105 SECTION 147 – KEEPING OF RECORDS 105 SECTION 46 APPLICATION ACT – STATUTORY DEPOSIT 105 LPUGR – COMPLIANCE 106 COMPUTERISED ACCOUNTING SYSTEMS 106 OLD BALANCES 106 STATUTORY PROVISIONS 107 LEGAL PROFESSION UNIFORM LAW APPLICATION ACT 2014 107 LEGAL PROFESSION UNIFORM LAW APPLICATION REGULATION 2015 107 LEGAL PROFESSION UNIFORM LAW (NSW) 107 LEGAL PROFESSION UNIFORM GENERAL RULES 2015 108 WORKED EXAMPLE 109 March 2016 Chapter One INTRODUCTION For accounting and support staff working for legal practitioners in sole practice, partnerships and incorporated legal practices, the necessity to deal with trust money and manage the accounting relating to trust money is an integral part of legal practice These Seminar Notes have been produced to make that process more efficient and to help legal practitioners and their accounting staff to reduce their exposure to problems relating to the keeping of accounting records for trust money These Seminar Notes: • Outline the basic records that must be maintained when handling various categories of trust money, specifically; o o o o o o money that must be deposited to a general trust account; written direction money; controlled money; transit money; money subject of a power; and in limited situations the investment of trust money which is not involved in financial services or investments • Present an explanation of records required to be kept • Detail the information required to be recorded in each of these records • Explain how each record interacts within the legal accounting system • Offer suggestions which, if adopted, should minimise risk and reduce the cost of compliance • Reproduce relevant sections of Part 4.2 of the Legal Profession Uniform Law (NSW) relating to trust money and relevant sections of Part 4.2 of the Legal Profession Uniform General Rules 2015 relating to trust records including amendments in force as at July 2015 • Provide worked examples of trust records commonly used in law practice sole practice – Chapter 20 March 2016 1.1 Importance of Record Keeping It is vital that a law practice’s trust records provide a complete historical record of all trust money transactions undertaken The legislation in force in New South Wales sets out the requirements as to the scope and form of such records The creation and maintenance of adequate and effective accounting systems for funds entrusted to a law practice improves the efficiency of legal practice and reduces the risks associated with the handling of funds entrusted to a law practice 1.2 The Legislative Regime The Legal Profession Uniform Law Application Act 2014 (NSW) applies the text of the Legal Profession Uniform Law as set out in Schedule to the Legal Profession Uniform Law Application Act 2014 (VIC) as the scheme to regulate the legal profession in New South Wales The scheme as it applies in New South Wales is referred to as the Legal Profession Uniform Law (NSW) The purpose is to establish a uniform legal services market in New South Wales and Victoria In New South Wales, the uniform legislative regime consists of the following: • • • • • Legal Profession Uniform Law (NSW) (referred to in these Seminar Notes as the LPUL); Legal Profession Uniform Law Application Regulation 2015 (NSW) (referred to in these Seminar Notes as the Regulations); Legal Profession Uniform Law Application Act 2014 (NSW) (referred to in these Seminar Notes as the Application Act); Legal Profession Uniform Law Application Amendment Act 2015 (NSW) (referred to in these Seminar Notes as the Application Amendment Act); Legal Profession Uniform Rules which consist of the following (collectively referred to as the Uniform Rules): • Legal Profession Uniform General Rules 2015 (referred to in these Seminar Notes as the LPUGR); • Legal Profession Uniform Admission Rules 2015; • Legal Profession Uniform Continuing Professional Development (Solicitors) Rules 2015; • Legal Profession Uniform Australian Solicitors’ Conduct Rules 2015 (referred to in these Seminar Notes as the ASCR); and • Legal Profession Uniform Legal Practice (Solicitors) Rules 2015 (referred to in these Seminar Notes as the Solicitors Rules) The regime commenced on July 2015 The introduction of the above instruments made changes to the previous legislative regime but a law practice’s compliance obligations with respect to trust accounts and trust money remain largely unchanged The provisions relating to trust accounts are contained in the following sections: • Part 4.2 of the LPUL – Sections 127 to 168 regarding trust money and trust accounts; March 2016 • • • • • • • Part 4.2 of the LPUGR – Rules 33 to 69 regarding trust money and trust accounts; Part 4.6 of the LPGUR – Rules 93 to 95 relating to the maintenance of a File Register, Register of Safe Custody Documents, and Register of Financial Interests These registers were previously required to be maintained under the New South Wales Professional Conduct and Practice Rules (Solicitors’ Rules) 2013; Part Division of the Application Act – Sections 46 and 47 regarding statutory deposits; Part of the Regulations – Rules to 12 regarding the calculation of the amount to be retained on statutory deposit The calculation of the amount to be held has not changed The calculator is still current although references to Approved ADI should read Authorised ADI This will be updated later in the year Part Division of the Application Act – Section 14 regarding unclaimed money and Section 11 regarding the designation of the Law Society Council as the local regulatory authority (except in certain situations); Rule of the Solicitors Rules regarding transfer of a practitioner’s practice which was previously Rule 53 of the New South Wales Professional Conduct and Practice Rules (Solicitors’ Rules) 2013; and Rule 12.3 of the ASCR regarding borrowing from a client which was previously Rule 12.3 of the New South Wales Professional Conduct and Practice Rules (Solicitors’ Rules) 2013 All sections referred to in these Seminar Notes are sections of the LPUL and all rules referred to in these Seminar Notes are rules of the LPUGR unless otherwise stated 1.3 Further Information If you need help or have any enquiries in regard to trust money or the maintenance of trust records, please contact the Trust Accounts Department of the Law Society of New South Wales on (02) 9926 0337 An officer of the Department will be happy to assist you with your enquiries The Law Society of New South Wales’ website at www.lawsociety.com.au makes available a list of examined software and an electronic calculator to assist law practices in respect of statutory deposit calculations March 2016 Chapter Two TRUST MONEY 2.1 Definition of Trust Money Section 129(1) defines trust money as: "money entrusted to a law practice in the course of or in connection with the provision of legal services by the law practice, and includes— (a) money received by the law practice on account of legal costs in advance of providing the services; and (b) controlled money received by the law practice; and (c) transit money received by the law practice; and (d) money received by the law practice, that is the subject of a power exercisable by the law practice or an associate of the law practice, to deal with the money for or on behalf of another person.” Section 153(1) provides that a law practice receives money when: (a) the law practice obtains possession or control of it directly; or (b) the law practice obtains possession or control of it indirectly as a result of its delivery to an associate of the law practice; or (c) the law practice, or an associate of the law practice (otherwise than in a private and personal capacity), is given a power or authority to deal with the money for or on behalf of another person Further, Section 153(2) provides that a “law practice or associate is taken to have received money if the money is available to the law practice or associate by means of an instrument or other way of authorising an ADI to credit or debit an amount to an account with the ADI, including, for example, an electronic funds transfer, credit card transaction or telegraphic transfer” See further below regarding the definition of “power” The concept of “power exercisable by the law practice or an associate of the law practice, to deal with the money for or on behalf of another person” is elaborated in Section 128(3) to mean a power given to the practice or associate exercisable by: March 2016 (a) the practice alone; or (b) an associate of the practice alone (otherwise than in a private and personal capacity); or (c) the practice or an associate of the practice jointly or severally, or jointly and severally, with either or both of the following— (i) one or more associates of the practice; (ii) the person, or one or more nominees of the person, for whom or on whose behalf the money may or is to be dealt with under the power Section 129(2) specifically excludes as trust money: (a) money received by a law practice for legal services that have been provided and in respect of which a bill has been given to the client; (b) money entrusted to or held by a law practice for or in connection with— (i) a managed investment scheme; or (ii) mortgage financing; undertaken by the law practice; (c) money received by a law practice for or in connection with a financial service it provides in circumstances where the law practice or an associate of the law practice— (i) is required to hold an Australian financial services licence covering the provision of the service; or (ii) provides the financial service as a representative of another person who carries on a financial services business However, pursuant to Section 129(2)(d) money received by a law practice for investment purposes is treated as trust money if: (i) the law practice received the money in the ordinary course of legal practice and primarily in connection with the provision of legal services at the direction of the client; and (ii) the investment is or is to be made in the ordinary course of legal practice and for the ancillary purpose of maintaining or enhancing the value of the money or property It should be noted that Section 134 requires that “if a law practice receives or holds money that is non-trust money (other than money for the payment of legal costs due to the law practice), it must give the person who provided the money written notice that: (a) (b) (c) 2.2 the money will not be treated as trust money; and the money is not subject to the provisions relating to trust money in this Law or the Uniform Rules; and a claim against the fidelity fund of this jurisdiction cannot be made in respect of the money What is Trust Money? The definition of trust money has three core elements; March 2016 10